World Bank proposes debt management reform

Set to approve 10-year Country Partnership Programme today, with estimated funding of $20b

Listen to article

ISLAMABAD:

The World Bank has recommended that Pakistan establish a permanent Debt and Risk Management Committee (DRMC) to mitigate growing fiscal risks and address the fragmentation in debt management. The committee would be accountable to Parliament, ensuring transparency and accountability in loan-related decisions.

The Washington-based lender has urged the finance ministry to introduce secondary legislation to address the "high debt burden," according to government sources. They added that the lender has repeatedly raised this issue in recent months.

The need for the committee was acknowledged during the last meeting of the steering committee for Revenue Mobilisation, Investment, and Trade Programme (REMIT), a United Kingdom-funded initiative chaired by the finance minister.

The World Bank proposed establishing the permanent committee to ensure that borrowings are sustainable, transparent, and accountable, said sources. New loans should align with macroeconomic balances and fiscal and monetary policies, according to the proposal.

Intra-ministry and inter-ministerial conflicts often lead to poor decision-making. Debt is separately recorded by the Economic Affairs Ministry and the central bank, preventing a comprehensive view of external debt repayments.

Loans from the IMF, the United Arab Emirates (UAE), Kuwait, and the $4.5 billion Chinese trade finance facility are booked on the central bank's balance sheet and shown as part of its external debt obligations. Serious fragmentation issues exist in Pakistan's debt management. Even within the finance ministry, coordination between the external finance wing and the debt management office is often lacking. The committee would ensure borrowings meet the government's financing needs at optimal costs with a prudent degree of risk, considering domestic and international market conditions, sources added.

Last year, the finance ministry negotiated a foreign commercial loan that could have been Pakistan's most expensive. The proposal was dropped after The Express Tribune reported on it. During the last REMIT steering committee meeting, the roles and mandates of various government departments involved in debt management were discussed. It was acknowledged that coordination between the planning, finance, and economic affairs ministries needs improvement.

The finance minister expressed a desire during the REMIT meeting to expedite the establishment of the permanent debt committee, sources said. Neither the finance ministry nor the economic affairs ministry responded to requests for comments on whether the government was considering the proposal.

The World Bank Board is set to approve Pakistan's 10-year Country Partnership Programme today (Tuesday), with an estimated funding envelope of $20 billion for the 2025-2035 period.

The framework document states, "The World Bank will continue to provide support to the establishment of a unified and coherent debt management function, reducing the costs and risks associated with the large debt portfolio."

"Pakistan has a high debt burden, heavy financial sector exposure to government debt, large external financing needs, and weak investor confidence," reads the Country Partnership Framework. The sources said a proposal is under discussion for the new committee to identify debt-related fiscal risks from loan guarantees and on-lending, regularly assess and mitigate these risks, and disclose them transparently.

The DRMC would promote sound, transparent, and efficient debt management practices and ensure the availability of high-quality public debt data.

The Ministry of Economic Affairs' website shows the last quarterly debt report was for March 2024, while the most recent annual debt report is two years old.

The sources said the debt committee would provide strategic oversight for public debt management and coordinate activities across stakeholders, including provincial authorities. It would also ensure prudent management of debt-related fiscal risks. Pakistan's total public debt surged to over Rs71 trillion last fiscal year, equal to 67% of the country's economy.

The draft proposal suggests the DRMC should assist the Debt Management Office (DMO) in formulating and updating a debt strategy based on cost-risk analysis. It would support the development of an annual borrowing plan aligned with debt management strategy targets. The DRMC would also review the implementation of the plan.

The committee would support the DMO in setting debt management objectives and targets. If domestic or external macroeconomic conditions significantly change, the DRMC would reassess and modify targets as needed.

The committee's responsibilities would also include endorsing debt sustainability analyses and developing strategies for loan guarantees and on-lending. It would assist in recording public debt comprehensively, enabling the DMO to access timely and accurate data. A central debt data repository is proposed, along with regular audits and a framework for debt recording and reporting.

The DRMC is envisioned to be co-chaired by the secretaries of the Finance Division and the Economic Affairs Division. Core members would include staff from the DMO, the State Bank of Pakistan, the Central Directorate of National Savings, and other relevant departments.

According to the draft, the DRMC should meet quarterly and hold ad-hoc meetings during significant market shifts or economic stresses.

The DRMC's effectiveness would be reviewed every three to five years by the finance and economic affairs ministers.

However, sources said the proposal is still under internal discussion and has not been finalised.